The long way back: what does it mean for foreign firms to return to Russia
Rumors about the return of many large foreign companies to the Russian market have entered the media space. No one has officially expressed a desire, but judging by the geopolitical dynamics, it may be a matter of time. The re-emergence of "disgraced" corporations in Russia may entail both opportunities and serious problems. Which companies are currently waiting in Russia, which could bring real benefits, and how they are planned to be integrated into the economy if the return does take place - in the Izvestia article.
A broad front left
In 2022, hundreds of companies with foreign participation decided to exit the Russian business. The decision, they claimed, was made voluntarily, but in reality there were often "consultations" with political forces in the countries where their headquarters are located. At the same time, they themselves often faced the fact that it was not so easy to exit the business, both for financial and legal reasons.
Although the departure of foreigners undoubtedly caused some damage to the Russian economy, reducing competition in the market, at the same time it spurred the development of Russian business. Most of the niches were successfully occupied over the next two years. At the same time, foreign companies suffered significant losses, which are estimated from tens to hundreds of billions of dollars. Many companies have left the market in such a way that they have a chance to return to it in the foreseeable future. Others have reduced their presence to the maximum, but they still do not dare to leave completely.
Of all the industrial sectors, the departure of foreigners has particularly affected, perhaps, the automotive industry. For Russian consumers, this resulted in a sharp increase in prices, not only for cars imported under gray import schemes from unfriendly countries, but also for domestic and Chinese brands. It has become much more difficult to buy a car in the country — prices have begun to approach housing prices. At the same time, the Russian automotive industry has gradually begun to explore this niche, although this process has been and remains difficult.
Renault was the first carmaker to enter Russia. The president of the company, Luca de Meo, allowed this option, however, noting that the purchase of a controlling stake in AvtoVAZ is not a priority. The company has an option to buy back shares over the next few years. However, as Maxim Sokolov, the head of the Russian automaker, said, in this case, she will have to reimburse 112.5 billion rubles of investments made during the years of absence.
In February, it became known that the South Korean automaker SsangYong was returning to the country under the KGM brand. The company will start selling its cars in Russia in the spring, and production under this brand will open in the Kaliningrad region in the fall.
In addition, just these days, another Korean corporation, Kia, has opened vacancies in its Moscow office after many months of silence. To be fair, the latter may not mean anything yet — we are talking about maintaining existing dealer contacts.
Note, however, that Japanese and South Korean companies are more inclined to cooperate with Russia than, say, European ones. So, on February 14, the Korean media reported on possible activity in Russia by Hyundai Motor.
In the field of banking and finance, nothing has changed yet. Of the three largest bank holdings, whose subsidiaries were present in the country, only Citigroup (Citibank) left Russia. Raiffeisenbank and Unicredit Bank, although they have reduced their presence to a minimum (they do not place term deposits, for example), still have not announced the final dates of departure. Given the changes in the market, this may not happen. For both credit institutions, Russia is the most important market that has supported them during the difficult recent years for the European economy. This is especially true of Unicredit, which has made impressive profits in the Russian Federation.
Dmitry Pyanov, First Deputy President and Chairman of the Board of VTB, said that the lifting of US sanctions on the National Payment Card System (NSPK) could be a harbinger of the potential return of Visa and Mastercard to Russia, but so far there are no signals or signs. However, given that the NSPK is successfully performing its functions, the return of companies is of little importance and consent to this may only involve concessions in some other areas.
The departure of clothing companies was very loud, but perhaps the least painful. Russian brands have worked quickly in this area. Nevertheless, for many companies like Zara and Bershka, the departure turned out to be an unpleasant event, for example, for shopping malls. This may be due to the fact that in the absence of recognizable names, clothing sales are increasingly going online, leaving mall owners without income. Leading privately negotiations on the potential return of foreign counterparties, they expect to invite consumers back to offline shopping.
Useful against inflation
What can the return of foreigners mean in the changed conditions of the Russian economy? At a minimum, it will be useful in terms of curbing inflation, says Dmitry Kuznetsov, a researcher at the International Laboratory for Foreign Trade Research at the IPEI Presidential Academy.
— The return of companies will lead to increased competition in the market, which in general should have a positive effect on price dynamics. For the goods of returned manufacturers, there will be no need to import them through the parallel import mechanism and use other delivery schemes, which, although they allowed for the presence of demanded goods on the Russian market, nevertheless affected the rise in price of these goods. Thirdly, cheaper and higher imports will free up some of the resources inside Russia, which will have a positive impact on the costs of Russian companies," the expert said.
According to him, at the moment, the most likely scenario for a return (if it does take place for the most part) is a fairly extended build-up of the presence. Because of this, the danger that a domestic business that has not fully recovered will be forced out of the market will be much less.
This scenario should be considered as the most favorable for Russian companies, since they will have the opportunity to prepare and form a strategy for long-term competition, Kuznetsov believes.
— The key negative factor in this case is high interest rates, which make it difficult for Russian companies to invest. As inflation decreases, the role of this factor will weaken, but during this process companies from the most vulnerable sectors may need government support, for example, through preferential loans for modernization projects in some industries, he noted.
Only on terms
As Olga Belenkaya, head of the Macroeconomic analysis department at Finam, emphasized, a rather strange situation is emerging: few well-known Western brands have seriously announced plans to return to Russia, but Russian officials say almost every day that the return must be subject to certain conditions.
— This approach may be related to the fact that the authorities want to protect domestic enterprises that have invested in forced import substitution over the past three years, and they fear that if foreign corporations return, Russian enterprises' investments (including through state support) in previously "liberated" market areas. niches can be devalued. And in the event of a new mass departure of foreign brands, the economy will once again find itself with abandoned enterprises that will have to be urgently rescued," the interlocutor explained.
She added that the most in-demand for the economy is the return of those Western companies for which there is no comparable replacement from manufacturers from Russia and friendly countries.For example, Visa and Mastercard (import substitution has occurred on the Russian market, but not for international payments), manufacturers of aircraft and aircraft parts, oilfield service equipment, electronics, and medical equipment.
— From the point of view of the consumer market, I think many would like Ikea, Western, Japanese and South Korean car brands, clothing and footwear to return. This could expand the range of offers on the Russian market, increase producer competition, and promote fairer pricing. It may be more difficult for the largest food brands, such as McDonalds, Coca Cola, and Sturbacks, to return, as these niches are already occupied," the analyst said.
Belenkaya believes that it is premature to wait for the mass return of foreign brands.
— Not least because geopolitical risks remain high and it is difficult to predict the US sanctions policy after the end of Donald Trump's presidency. If these risks are quite acceptable for foreign businesses to resume foreign trade with Russia, they may be too high for serious long—term investments," she concluded.
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